Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
XXXXX
Case Number: 108014
Attention: XXXXX
XXXXX
May 5, 2009
Subject:
GST/HST RULING
Construction and Rental of Artist Live-work Studios
Dear XXXXX:
Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the construction and rental of condominium units in a mixed-use building, where the units in question are zoned for "live-work" use. We apologize for the delay in our response.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
On the basis of your letter and attachments as well as our additional research, we understand the facts as follows:
1. XXXXX is a Canadian resident corporation that is registered for GST/HST purposes under Business Number XXXXX.
2. XXXXX is the development and investment manager of a joint venture that, at the time of your writing, was completing construction of its XXXXX-storey mixed-use building located at XXXXX in XXXXX, known as "XXXXX". XXXXX and the other joint venture participants have made an election pursuant to section 273 in which XXXXX is identified as the operator of the joint venture.
3. XXXXX includes XXXXX levels of underground parking, XXXXX, and XXXXX condominium units ("the Units"), along with a fitness facility and XXXXX for the exclusive use of the Units' residents.
4. Each of the Units is registered as a separate strata lot under Strata Lot Plan XXXXX.
5. The City of XXXXX's XXXXX ("the By-law") makes provision for artist studios, both on their own and for live-work use, under the broader heading "Cultural and Recreational Uses". When used without a qualifier, the term "Artist Studio" is defined therein to mean both an "Artist Studio - Class A" and an "Artist Studio Class B". These uses are further defined as:
Artist Studio - Class A "... means the use of premises for the production of dance, live music, creative writing, painting, drawings, pottery or sculpture, video, moving or still photography, none of which involves amplified sound or one of the materials or processes specified under Artist Studio - Class B;"
Artist Studio - Class B, "means the use of premises for the production of
(a) dance or live music involving electronically amplified sound,
(b) moving or still photography (excluding video) involving on-site film processing,
(c) paintings, drawings, pottery or sculpture involving the use of fibreglass, epoxy and other toxic or hazardous materials or one or more of the following processes: welding, woodworking, spray painting, silk screening or fired ceramics;"
"Live-Work Use" is defined in part as "the use of premises for:
(a) a Dwelling Unit,
(b) ... Artist Studio - Class A, or
(c) any use referred to in subsection (b) in conjunction with a Dwelling Unit use..."
"Dwelling Unit" is defined to mean a self-contained housekeeping unit that is subject to the provisions of section XXXXX of the By-law.
6. Section XXXXX of the By-law includes the following stipulation:
XXXXX
7. Schedule XXXXX to the By-law establishes the various permitted uses and conditions of use for properties zoned for mixed use and provides for dwelling uses that are designed compatibly with commercial uses. XXXXX of that Schedule allows the Development Permit Board to approve the use of property as an Artist Studio, subject to the provisions of section XXXXX of the By-law, and to approve the use of property as a "Residential Unit associated with and forming an integral part of an artist studio", subject to the provisions of section XXXXX of the By-law.
8. Section XXXXX of the By-law stipulates:
XXXXX
XXXXX
9. Section XXXXX of the By-law stipulates, in part:
XXXXX
10. On XXXXX, XXXXX City Council adopted the contents of a document entitled XXXXX, which are to be used in conjunction with the By-law in an XXXXX. Per section XXXXX of the XXXXX:
• XXXXX
• XXXXX
The Units are zoned for this latter use.
11. The Web site for this project, XXXXX, depicts XXXXX XXXXX floor plans for the Units, each of which reflects a fairly typical residential layout comprised of kitchen, living room, dining room, bedroom(s), and bathroom, together with (in most cases) a separate room or designated alcove area identified as "work".
12. The Units range in size from XXXXX sq. m. to XXXXX sq. m. Of the XXXXX Units whose floor plan illustrates a designated "work" space:
• XXXXX reflect a work space of XXXXX sq. m.,
• XXXXX reflects a work space of XXXXX sq. m.,
• XXXXX reflect a work space of XXXXX sq. m., and
• XXXXX reflect a work space of less than XXXXX sq. m. in size.
The floor plan for the remaining XXXXX Units reflects no specific "work" space, instead identifying a XXXXX sq. m. area (XXXXX) as "live/work".
13. According to the aforementioned floor plans, the exterior space (in the form of patios, balconies, or a combination of the two) forming part of any particular Unit ranges from an additional XXXXX sq. m. to an additional XXXXX sq. m. XXXXX
14. The project is marketed on the Web site, in part, as follows:
"XXXXX"
The accompanying photographs of a Unit depict only furnished "living" space (i.e., a kitchen, bathroom, bedroom, and living room); no "work" space is displayed.
15. At the time of your writing, XXXXX had begun to rent the Units to tenants.
16. You provided a sample of the XXXXX ("the Tenancy Agreement") to be entered into by every tenant in relation to their Unit (identified by its strata lot number, together with the limited common property of that strata lot). The relevant provisions of the Tenancy Agreement for purposes of this discussion are:
XXXXX
XXXXX.
XXXXX
XXXXX.
XXXXX
XXXXX
17. XXXXX
• XXXXX
• XXXXX
18. XXXXX has issued written authorization for the Canada Revenue Agency (CRA) to provide XXXXX with confidential information about its operations for purposes of its request for a ruling or interpretation in relation to this matter.
YOUR POSITION
As the zoning for the Units stipulates that they be used in part for artistic pursuits and in part as a residence, your submission focuses on the need to identify the real property that forms a "residential complex" for purposes of section 191, subsection 136(2), and paragraph 6(a) of Part I of Schedule V to the ETA or, alternatively, a "residential unit" for purposes of section 256.2. You refer to the objects of each of these provisions as they may apply to the Units simply as "the residential portion", and refer to any remaining portion of the Units as "the commercial portion".
You offer two approaches to identify the object for purposes of section 191.
The first approach relies on the definition of "residential unit" which includes a "... condominium unit ... or that part thereof that
(d) is occupied by an individual as a place of residence or lodging,
(e) is supplied by way of lease, licence or similar arrangement for the occupancy thereof as a place of residence or lodging for individuals,
(f) ... or
(g) has never been used or occupied for any purpose, but is intended to be used as a place of residence or lodging for individuals."
The use of the words "or part thereof" indicates that a condominium unit can be separated into two components, one of which is a residential unit and one of which is not. You conclude that when XXXXX leases a Unit to a tenant, subsection 136(2) deems two properties to be supplied separately, one being a residential complex (that you identify as that part of a building in which one or more residential units are located) and the other being real property that is not part of the residential complex. You also conclude that XXXXX would only be required to account for the tax deemed collected, under subsection 191(1), calculated on the fair market value of that portion of the condominium unit that is the residential unit.
The second approach focuses instead on the definition of "residential condominium unit" in subsection 123(1), which refers to a "... bounded space in a building ...". You interpret that to mean that the same bifurcation as under the definition of a "residential unit" above is not possible in the case of a residential condominium unit. If so, you suggest that the correct treatment would be for XXXXX to account for the tax deemed collected, under subsection 191(1), calculated on the fair market value of each entire Unit, but claim an input tax credit ("ITC") for the tax deemed to be paid under subsection 191(1) that is attributable to the commercial portion of each Unit.
In either event, it is necessary for valuation purposes (e.g., in applying section 191, section 256.2, paragraph 6(a) of Part I of Schedule V to the ETA, etc.) to establish the proportion of each Unit attributable to the residential portion as opposed to the commercial portion.
You indicate that, as a practical matter, it is impossible for XXXXX to establish what portion of each Unit will actually be used by a tenant as a residence and what portion will be used in business activities. Even should a tenant be required to declare their intention on a questionnaire, there is no certainty that the proportions would be adhered to. Moreover, the use of any particular Unit could change from one year to the next and from tenant to tenant, creating compliance requirements that would be difficult, if not impossible, to meet. For practical purposes, therefore, you believe it would be reasonable to treat each Unit as having a fixed amount of work space, i.e., XXXXX sq. m., corresponding to XXXXX.
Rulings Requested
You have therefore requested that we confirm the following:
1. That XXXXX shall treat XXXXX sq. m. of each Unit as a commercial real property rental and the remainder of each Unit as a residential real property rental.
2. That XXXXX shall charge GST on a portion of the rent attributable on a proportionate basis to the commercial portion of each unit.
3. That XXXXX shall self-assess GST on a portion of the fair market value of each Unit that corresponds to the residential portion of the Unit.
4. That XXXXX shall be entitled to claim new residential rental property rebates for a portion of the GST self-assessed where the fair market value of the residential portion of the Unit does not exceed $450,000.
Rulings Given
Based on the facts set out above, we rule that:
1. XXXXX cannot treat XXXXX sq. m. of each Unit as a commercial real property rental and the remainder of each Unit as a residential real property rental;
2. XXXXX is required to collect GST on the portion of the rent that is attributable to the part of the Unit that does not form part of the residential complex;
3. the GST deemed to be collected in respect of a deemed supply of a Unit under subsection 191(1) is calculated on the fair market value of the part of the Unit that is a residential complex; and
4. XXXXX will not be entitled to claim a new residential rental property rebate under section 256.2 in respect of a portion of the GST deemed to be paid by XXXXX under subsection 191(1) for a particular Unit and calculated on the fair market value of the part of the Unit that is a residential complex where that fair market value exceeds $450,000 at the time that the tax is deemed to be paid, even if the particular Unit is a "qualifying residential unit" as defined in subsection 256.2(1) at that time, and all of the other conditions and filing requirements for this rebate are met.
These rulings are subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by these rulings provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
Determination of "residential unit"
The definition of "residential unit" consists of a "structural" requirement referred to in paragraphs (a) to (c) of the definition, as well as a "functional" requirement referred to in paragraphs (d) to (g). Should the particular Unit in question satisfy any of paragraphs (a) to (c) as well as satisfy any of paragraphs (d) to (g), then such a Unit would satisfy the definition of a "residential unit" as defined in subsection 123(1).
The CRA interprets the phrase "or that part thereof that" in the definition of "residential unit" as referring to the functional components described in paragraphs (d) to (g) of the definition and that therefore removes from the meaning of "residential unit" those parts of a structure described in paragraphs (a) to (c) that are used for a function or purpose other than those functions or purposes described in paragraphs (d) to (g) of the definition.
Hence, as defined, a "residential unit" may include a "... condominium unit ... or that part thereof that ...
(g) has never been used or occupied for any purpose, but is intended to be used as a place of residence or lodging for individuals;"
Determination of "residential complex"
Subsection 123(1) defines "residential complex", in part, as
"... (b) that part of a building that is
(i) the whole or part of a ... residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real property owned, or intended to be owned, apart from any other unit in the building, and
(ii) a residential unit,
together with that proportion of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the unit and that is reasonably necessary for its use or enjoyment as a place of residence for individuals,"
Therefore, a residential complex may be less than the entire parcel of real property identified in paragraph (b) above.
In all cases, it is a question of fact as to the physical portion of real property that forms part of a "residential unit" or a "residential complex". As a general rule, the intentions of the supplier, and not those of a purchaser or a tenant, are taken into consideration in determining whether the real property held for purpose of supply is a residential complex. In the absence of any actual use of the real property by the supplier, the factual circumstances (such as zoning regulations, design, and the supplier's marketing of the property) serve to establish the property's intended use when applying this definition for purposes of the ETA.
In light of your request, we have examined each of these factors within the confines of the information available. Based on the Units' zoned use, and XXXXX requirement (per section XXXXX of the Tenancy Agreement) that the Units be used both for residential purposes and as an artist studio (Class A) and for no other purpose, we are of the opinion that the Units are comprised of both a residential complex and real property that does not form part of the residential complex. However, in our view, neither the zoning, design, nor marketing of the Units support the proposed allocation of "residential" and "commercial" space within the Units i.e., that XXXXX sq. m. in each Unit is commercial space. We will address each of these factors in turn.
First, section XXXXX of the By-Law stipulates the total minimum and maximum size of the entire live-work unit that is used in part as an artist studio; as confirmed by the Zoning and Planning Department of the City of XXXXX, it does not set a minimum size for the artist's actual "work space" within those premises. Nor is provision made elsewhere in the By-law for the size of the work space within such premises. On the other hand, we note that section XXXXX of the By-law stipulates a minimum floor area for a dwelling unit used in conjunction with an artist studio. Specifically, as indicated in Fact 6 above, the dwelling unit portion of such premises must have a minimum floor area of XXXXX sq. m. measured from the inside of all outer walls, unless otherwise authorized by the Director of Planning. Even where a lesser floor area is permitted, the dwelling unit can be no less than XXXXX sq. m. in size.
Second, we are of the opinion that the design of the Units themselves does not support the allocation, as proposed. The XXXXX floor plans depicted on the Web site for this project XXXXX. Specifically, the designs of the Units at issue depict what would be considered "typical" residential layouts for condominium units of their size, and any areas specifically identified as "work" are generally commensurate in dimension and location with what might otherwise be designated a second bedroom or den. As noted in Fact 12, floor plans for only XXXXX of the XXXXX Units reflect a designated work space in excess of XXXXX sq. m., and of those, no work space exceeds XXXXX sq. m. Furthermore, the floor plan for XXXXX of the Units reflected no designated work space at all. Rather, the XXXXX sq. m. area XXXXX was marked as "live/work".
Third, the Web site for this project promotes the Units in part as "XXXXX". However, there is no suggestion that a significant portion of any given Unit is reserved as work space, nor is any work space depicted in the accompanying XXXXX.
Finally, the proposed allocation runs contrary to the heavy emphasis placed in the Tenancy Agreement on the governing authority of the XXXXX, an enactment that does not extend to living accommodation forming part of premises that are primarily occupied for business purposes and rented under a single agreement. If the proposed allocation of XXXXX sq. m. reasonably represents the "commercial" portion of each Unit, the "commercial" portion would exceed the size of the "residential" portion in XXXXX of the XXXXX Units. It is unclear as to how these contrary positions can be reconciled.
In summary, based on our analysis of these factors, it is our view that the proposal put forth for our consideration does not reflect a reasonable allocation between the physical portion of each Unit which constitutes a "residential complex" and that which does not. In our opinion, a fair and reasonable apportionment between the residential complex and the non-residential portion must be undertaken on a Unit by Unit basis, taking into consideration both the distinct characteristics of each floor plan and the remaining factors addressed above.
Self-supply
The deeming provisions under subsection 191(1) apply when XXXXX first gives possession of a Unit to an individual under the Tenancy Agreement, and that individual is the first individual to occupy the Unit as a place of residence after its construction is substantially complete. XXXXX is therefore required to account for the tax deemed to be collected in respect of the deemed sale of that portion of the Unit that is a residential complex, calculated on the fair market value of the complex.
Where the fair market value of the Unit must be apportioned between the portion of the Unit that is considered to be a residential complex and the portion that is not part of the residential complex, the apportionment must be fair and reasonable. As such, consideration should be given to the relative value of the improvements made to the respective portions.
Apportionment of rents
As you are aware, where a supply of real property includes a residential complex and other real property that is not part of the residential complex, subsection 136(2) will apply to deem the supply of the residential complex and that other part of the real property to be separate supplies and neither supply is incidental to the other. Such is the case for XXXXX's supplies of each Unit under the Tenancy Agreement.
The supply of that portion of each Unit that is a residential complex is an exempt supply under section 6 of Part I of Schedule V to the ETA, while the supply of the remainder of each Unit is a taxable supply. Therefore, an apportionment of the rent must be made between these supplies on a reasonable basis in accordance with subsection 153(2). Whether a specified portion of the rent (e.g., based on space) is reasonably attributable to the making of the exempt supply (or supplies) as opposed to the making of the taxable supply (or supplies) is a question of fact.
It is our view that an apportionment of rent based on the relative space occupied by the residential complex and the "commercial" property would be reasonable where these portions are identical in every significant respect (e.g., values attributable to improvements, etc.).
We note that the sample Tenancy Agreement specifies that GST applies to the rent pertaining to at least XXXXX sq. m. of a particular Unit due to "XXXXX". For the reason already cited, this wording appears to be founded on a misunderstanding of the zoning regulations.
In light of the foregoing, if XXXXX collected, from tenants, GST on the portion of the rent attributable to the "commercial" portion of a Unit based on the proposed XXXXX sq. m. allocation, XXXXX would remain liable to report all amounts it had collected in error as or on account of tax. XXXXX may credit or refund the amounts collected as or on account of tax in error in accordance with section 232.
Generally, in this case, it would appear that the allocation for a particular Unit would remain fairly constant over time; however, if XXXXX becomes aware of an increase or decrease in the use of a Unit by a tenant, XXXXX may be considered to have accepted such a change. In this case, the amount of tax to charge in respect of the rent will change and a change in use may occur which may have GST implications. For example, if XXXXX becomes aware that a tenant is using their Unit only for residential purposes and XXXXX continues to supply the Unit to the tenant and does not enforce the terms of the Tenancy Agreement (e.g., XXXXX has not received and does not pursue the tenant for copies of the certificates of insurance with respect to the business activity of the tenant), the supply of the Unit will be exempt regardless of any floor space designated as "work" use in the floor plan or "commercial use" referred to in the Tenancy Agreement. In such a case, XXXXX would not charge GST in respect of the rent, a change in use would be triggered and XXXXX would be required to account for GST on this change in use.
New residential rental property rebate
A person who begins construction of a residential complex or an addition to a multiple unit residential complex after February 27, 2000, will qualify for the new residential rental property rebate if all of the conditions in section 256.2 are met, subject to the additional restrictions set out in section 263. The following discussion focuses on select requirements in this regard.
One condition for a rebate in relation to a given residential unit is that the residential unit is a "qualifying residential unit" as defined in subsection 256.2(1). Whether a given residential unit in this case is a qualifying residential unit under section 256.2 at a particular point in time will depend on whether the requisite conditions are satisfied at that time.
Generally, in the case of a self-supply, where the real property is a residential complex that is a single unit residential complex or residential condominium unit and other real property, the rebate available under subsection 256.2(2) is for a portion of the tax that is deemed to be paid under subsection 191(1) which is calculated on the fair market value of the part of the real property that is a residential complex, provided that this value does not exceed $450,000 and all of the other conditions for the rebate are met. XXXXX
Another of the conditions is that XXXXX must have reported the tax in respect of the deemed supply under subsection 191(1) for the residential complex in question in the return for the reporting period in which the tax was deemed to be collected and remitted all net tax remittable, if any, as reported in that return. It is not evident from your submission that XXXXX has yet accounted for any of the tax deemed to be collected in relation to the Units already rented. If XXXXX has accounted for the tax deemed collected based on the proposed allocation, for the reasons already cited, the amount reported in that regard may have been less than that required under the circumstances.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-3772. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Marcel R. Boivin
Manager, Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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